New agree­ment on special price regu­lation concer­ning geo­ther­mal energy

For a long time, there has been talk about the potential of geothermal heat as this technology may contribute significantly to the green change-over. At present, Denmark has three geothermal plants. So far, no further plants have been established. Geothermal projects carry substantial exploration costs and a certain risk that no district heating will be produced.

Exploitation of geothermal heat requires solid economic limits

A model which may limit the risk of the users of district heating may work as follows: Geothermal plants are established and operated by external partners while the district heating companies purchase the produced heat at an agreed price. The problem is that the present price regulation of the Heat Supply Act does not take this model into account as it does not provide any guarantee to the providers of geothermal energy that they may obtain the agreed price.

Under the general regulation, it is possible only to obtain the cost-determined price of the specific geothermal plant with the addition of a specific profit. As a consequence of the principle concerning substitution price applicable under case law, a district heating company may furthermore demand a regulation of the price if there is or will be a possibility of producing or purchasing the heat at a cheaper price yourself.

Geothermal plants require large investments but may on the other hand then supply hear for a long time without any large additional costs. To be profitable for the provider of geothermal energy to take the investment risk, long-term price agreements should be concluded without the risk of the agreed price being set aside

Political agreement on a new price regulation is to promote geothermal energy

Taking into consideration the green change-over and the ambitious CO2 reduction targets, a political majority - the government, the Liberal Party, the Danish People's Party, the Socialist People's Party, the Social-Liberal Party, the Red-Green Alliance, the Conservative Party, the Liberal Alliance and the Alternative - concluded a political agreement in December 2021 concerning a new price regulation model for geothermal energy.

The agreement proposes a change of regulation by way of regulatory control of the agreement between the provider of geothermal energy and the district heating company. If the agreement fulfils the requirements, the geothermal heat may be supplied on the terms agreed between the provider and the district heating company. In that case, the provider will be exempted from the general price regulation, and the district heating company may charge the prices paid for the geothermal heat. The new regulation is expected to come into force on 1 January 2023 and will also apply to agreements concluded before that date if the supply starts after 1 January 2023.

The political agreement lays down that the expected new economic regulation of the district heating sector must cover future exploitation of geothermal heat. The consumers must be solidly protected. This means that the agreed special price regulation may be replaced by the new rules. However, the political agreement provides that supplies of geothermal heat, which are to be covered by the terms adopted based on this agreement, must be exempted from the price regulation in the term of the agreement.

Check list for the agreement

The Utility Regulatory is to consider the applications for exemption from the price regulation. Applications may be approved if certain conditions are fulfilled (the check list model): The district heating company is to apply for exemption from the price regulation. If the Utility Regulatory approves an application, the company must still report prices and costs from the provider of geothermal energy for evaluation purposes, i.e. to assess new agreements.

A general condition for approval is that, at the time of the conclusion of the agreement, the geothermal project is the most advantageous solution from a socio-economic and corporate economic point of view compared to the alternatives. It is not clear whether this implies that geothermal projects must be approved under the Heat Supply Act in the future - today the establishment of geothermal plants is regulated solely based on the Subsoil Act - or whether the applicant simply has to produce its calculations.

The agreement between the provider of geothermal energy and the district heating company must also contain a number of consumer protective elements:

• A contractual price cap, i.e. that the parties have agreed a cap on the costs which the consumers are to pay.
• All risks involved in connection with the subsoil (exploration, drilling, operation) will rest on the provider.
• A method showing that the plant is established and operated effectively. If efficiency gains are obtained, these may not accrue only to the provider. They must be shared with the district heating company, and the agreement must contain an allocation key in this respect.
• A guarantee that the district heating company only pays for supply of heat from the geothermal plant and does not in any way contribute to payment of the investment when there is no supply. This means that the agreement must ensure that costs will not be imposed on the district heating company until it receives heat, and that payment cannot be charged if the plant is not productive.

Geothermal energy in brief

Geothermal energy is a renewable energy found in the subsoil in the form of hot water where the heat in the water is utilised.

In a geothermal plant, the hot water is pumped up from the subsoil through a drilling, and the heat from the water is extracted through heat exchangers. The cooled water is then pumped back into the subsoil.